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The 10 Laws Of A Stock Market Super Bubble From Doug Kass

Every great pundit and financial commentator has an opinion about financial bubbles. Like many we are also genuinely interested in them. We recently read a piece from Doug Kass titled, 10 Laws of Stock Market Bubbles. Below you'll find the two must see points.

Here's an excellent quote about trying to trade or invest around a bubble:

The problem with bubbles is that if you sell stocks before the bubble bursts, you look foolish, but you also look foolish if you sell stocks after the bubble bursts.

These are Doug Kass' 10 laws of a stock market bubble:

1.) Debt is cheap.
2.) Debt is plentiful.
3.) There is the egregious use of debt.
4.) A new marginal (and sizeable) buyer of an asset class appears.
5.) After a sustained advance in an asset class's price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
6.)The distance of valuations from earnings is directly proportional to the degree of bubbliness.
7.) The newer the valuation methodology in vogue the greater the degree of bubbliness.
8.) Bad valuation methodologies drive out good valuation methodologies.
9.) When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
10.) Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed "financial weapons of mass destruction").